By Brett Arends
I have a surefire way of using bitcoin /zigman2/quotes/31322028/realtime BTCUSD -3.73% , ethereum /zigman2/quotes/108573964/realtime ETHUSD -3.64% and other digital currencies to finance your retirement—but I can’t recommend it.
Go out and buy a bunch of bitcoin (or other digital currencies), get a receipt, and then immediately sell them. Keep the receipt.
Then, when these currencies next collapse in price, as they are highly likely to do, go out and buy a bunch more. Immediately sell the ones you’ve just bought, and get another receipt.
You will now have two receipts. One will show you bought a ton of bitcoin—or whatever—when the prices were up high, as they are right now. The other will show you sold the same amount of Bitcoins when it was much cheaper.
So long as you are careful not to leave any documentary proof of the other two transactions, you can then claim these fictional “losses” on your tax return. The IRS considers these digital currencies as property or investments , and taxes them as such .
You can use these “losses” to shelter any other (real) capital gains, and up to $3,000 a year of income, from tax. Savings? As much as you can claim.
Sure, if you get caught, you’ll probably go to jail for tax evasion. I’m not recommending it. But I’m passing the information on.
(By the way, if the IRS audits you, I can only quote the Miami Herald’s Dave Barry in similar circumstances. “If you follow my advice, and the IRS asks you where you got your information,” he told readers, “remember to give them my full name, George Will.”)
OK, so technically this maneuver is illegal. But, hey, maybe you won’t get caught.
And anyway, since when has “what’s legal” mattered to investors in bitcoin or other digital currencies?
The number one utility of cryptocurrencies is breaking the law. Digital currencies are fabulous vehicles for financing terrorism, drug deals, child pornography, murder for hire, money laundering, and pretty much anything else that is illegal but which you could in theory pay for online.
A study in the Review of Financial Studies found that about half of all bitcoin transactions world-wide were associated with criminal activitie s. “We find that approximately one-quarter of bitcoin users are involved in illegal activity,” the researchers found. “We estimate that around $76 billion of illegal activity a year involves bitcoin (46% of bitcoin transactions), which is close to the scale of the U.S. and European markets for illegal drugs.”
For anyone who wants to take part in legal online transactions, there are much simpler mechanisms than buying cryptocurrencies and setting up “virtual wallets.” You can just use…er…your debit card and bank account. And things like Google Pay and Apple Pay and PayPal /zigman2/quotes/208054269/composite PYPL +0.73% .
Yet digital currencies are now becoming so popular as investments that you can hold them in a variety of individual retirement accounts. I received yet another news release the other day about a company allowing us to hold cryptocurrencies in IRAs.
Meanwhile hedge-fund manager Paul Tudor Jones— not to be confused with Tenpole Tudor —was promoting bitcoin on CNBC recently as an “inflation hedge” and comparing it with the great technology investments of the past.
“It’s like investing with Steve Jobs and Apple, or investing in Google early,” he said. His rationale? “bitcoin has this enormous contingent of really smart, sophisticated people who believe in it,” he said. “You’ve got this group of people…who are dedicated to seeing bitcoin succeed and becoming a commonplace store of value.”